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31 January 2012

The myth of US industrial revival

Currently a number of attempts are being made to claim a major revival of US industry is taking place. For example Harold L. Sirkin, of the Boston Consulting Group, writes: ‘A resurgence of U.S. manufacturing seems to be in the offing. With production costs rising in China, some companies are bringing their manufacturing back to the U.S…. That's partly confirmed by the data: The Institute for Supply Management (ISM) recently reported that U.S. manufacturing had expanded for 24 consecutive months. Likewise, the Federal Reserve reported a 0.6% increase in manufacturing in July 2011, with a year-on-year gain of 3.8%.’ Washington Post columnist Vivek Wadha claims: ‘America is destined to once again gain its supremacy in manufacturing, and it will soon by China’s turn to worry.’

It is therefore important to be clear that these claims are a myth. As may be seen in Figure 1 US industrial production has not even regained pre-financial crisis levels. In December 2011, the latest available data, US industrial production was 5.4 per cent below its peak in the previous business cycle. Equally striking, for the long term, is that since June 2000, the peak of the last but one business cycle, average annual US industrial growth has been only 0.3 per cent. In short, far from a ‘rebirth’ of US industry occurring, US industrial production has scarcely grown for over a decade and so far in the present business cycle it has not even regained its previous peak level of output. On the latest monthly data it would take US industry two years to regain its previous peak output.

Figure 1

Sirkin presents as evidence to justify his claims: ‘Volkswagen, for example, recently opened a new $1-billion factory in Chattanooga, Tennessee; Embraer, the Brazilian manufacturer of mid-size commuter jets, recently opened an assembly plant in Melbourne, Florida; and Mitsubishi Nuclear Energy Systems, which builds nuclear power plants and components, is locating a new engineering center in Charlotte, North Carolina.’ Publicity was given by others to a US company exporting chopsticks to China.

Unfortunately presentation of individual examples proves nothing. Industrial production is an aggregate, an average of different movements by companies. There will therefore always necessarily be cases above and below the average. Finding individual companies which are expanding, whether in chopsticks or anything else, therefore doesn’t constitute proof – even if US industry were sharply declining individual expanding companies may well exist.

Sirkin’s statistic that US manufacturing has been expanding for 24 months also doesn’t prove anything. Choosing particular starting dates, rather than considering the overall trend, has a well understood effect in distorting analysis. For example take 1933, the depth of the Great Depression, as a starting point for measuring US economic growth during the 1930s. By 1939 the US economy had expanded by 50 per cent. Solely from this one might conclude that the 1930s were a period of prosperity, whereas actually they were the worst decade in US economic history. The statistical distortion is to measure from the lowest point of the business cycle, ignoring the enormous fall in US GDP which took place in 1929-33. To avoid such statistical distortion economic analysis must state what points in the business cycle it is comparing and consider the economic process as a whole.

To see how this error distorts perception of US industry note that by the time US industrial output reached its bottom in the present recession, in June 2009, it had to grow by 21 per cent to regain its previous peak output. By December 2012, which indeed was after two and a half years of expansion, the increase was 14 per cent. Such an expansion of 14 per cent might sound impressive – it is a growth of over five per cent a year. But such an 'optimistic' conclusion distorts the reality – because 21 per cent growth was required to even regain the previous peak level of production!

Apple’s Steve Jobs stated the reality of US manufacturing reality at a dinner with President Obama last February. Asked what would shift iPhone production to the US, Jobs bluntly replied ‘those jobs aren’t coming back’.

US manufacturing ‘rebirth’ can only be claimed when there is statistical evidence to support it, not when output has not even regained previous peak levels.

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An earlier, non-technical, version of this article appeared in Global Times.